Fifth Circuit determines that a covenant not to sue is a settlement that extinguishes the duty to defend.

On November 11, 2019, the U.S. Court of Appeals for the Fifth Circuit held in Aggreko, L.L.C. v. Chartis Specialty Ins. Co., No. 18-40325, slip op. (5th Cir. Nov. 11, 2019), that, under both Texas and Louisiana law, a covenant not to execute extinguished the primary insurer’s duty to defend its insured.

The case arose out of a wrongful death suit. The primary insurer initially defended the defendant-insured Aggreko, but later paid the claimants the remainder of the policy limits and secured from the claimants a covenant not to execute any judgment obtained against the defendant-insured, except to the extent of available insurance in the excess layer. The primary insurer thereafter stopped defending its insured.

The issues on appeal were: (1) whether the district court correctly applied Texas law instead of Louisiana law and (2) whether the district court correctly found the primary carrier’s duty to defend was exhausted when it paid the limit of the $1 million policy. Whether the duty to defend was exhausted turned on whether the covenant not to execute was a “settlement,” because the primary carrier’s policy specified that the duty to defend ended only when the insurer “used up the applicable limit of insurance in payment of judgments or settlements.” Aggreko, slip op. at 2.

The Court declined to decide which state’s law applied, instead finding there was no conflict of laws because the covenant not to execute was a “settlement” under each state’s law, sufficient to relieve the primary carrier of its duty to defend under the applicable policy language.

In so holding, the panel rejected the excess insurer’s argument that the limits payment could not be considered a settlement because there was no full release of the insured from the suit. Noting that the policy did not define the term “settlement,” the court extensively analyzed both Texas and Louisiana jurisprudence and determined that both state’s high courts would conclude that the covenant not to sue was a “settlement” under the policy because decisions in both states recognized the possibility of a settlement when a full release of the insured was not obtained.

The Fifth Circuit’s ruling is significant. It recognized the longstanding practice in Louisiana known as the Gasquet settlement, where a primary insurer pays an amount and obtains protection for its insured against personal liability, allowing the claimant to reserve claims against other insurance. It also confirms the manner in which, under both Texas and Louisiana law, a primary carrier may exhaust its duty to defend – namely, obtaining full protection for the insured against personal liability. And it serves as a reminder to excess carriers to monitor any claim for the possibility that the exposure may reach the excess layer. After the Aggreko decision, such claims may more likely become a loss the excess insurer must consider without the benefit of a defense provided by the primary layer.

A petition for rehearing is expected to be filed.

About the author:

Stephen Miles is a founding member of Pipes Miles Beckman, LLC. He is licensed to practice in both Louisiana and Texas, and regularly advises insurers on questions regarding coverage and extra-contractual liability. For more, visit www.pipesmiles.com.